Is There No Shame in the Mortgage Scandal?

The same group of trial lawyers and civil rights activists who were suing banks for “red lining” — restricting mortgage loans — to low income areas are now targeting those same banks for providing “sub-prime loans” to these same low income areas. Far from accepting any responsibility for demanding loans to people who lacked the resources to repay them, these vultures are finding ways to line their pockets on both ends of an ill-fated venture.

Let’s recap what led up to the subprime mortgage crises and the companion collapse of the housing market.

America’s economy was roaring along thanks to Reagan’s tax cuts, Clinton’s intelligence to leave sleeping dogs lie, and Bush’s tax cuts in the post-9/11 recovery. More and more people were moving out of apartments and into homes — new and resold. That part of the American dream was coming true for an increasing number of the economic middle class. As demand grew it out paced supply and housing values began to rise.

But the economic lower class was unable to participate in the expanding housing market. And why was that you ask? Well, because they did not generate enough income to qualify for or repay mortgages at current rates. In the common sense world of finance you don’t loan money to those who cannot or will not pay it back. If you do you are on the road to going out of business yourself.

Enter the low income advocates, the civil rights activists and the ever creative trial lawyers. Class action lawsuits were filed against financial institution alleging that these institutions had “red lined” areas of the major metropolitan areas by refusing to provide loans to its residents. In many of those areas the residents were people of color. The flawed logic of their assertion is that if loans are denied to people who cannot repay them and that among people who cannot repay them are people of color, then denial of loans to such people must be based on racism. Plato, Socrates and St. Thomas Aquinas are still retching from the beating that logic took at the hands of these masters of confusion.

But it was good enough for their sycophants in Congress. Up stepped the likes of Rep. Barney Franks (D-MA) and Sen. Chris Dodd (D-CN) who began a ritual beating of the Federal Reserve, the federal bank regulators, and the banks themselves regarding the nefarious “red lining.” They demanded and received commitments to impose a quota of the banks loan portfolios to people who did not meet the reasonable criteria for repaying loans — people who could not or would not repay the loans.

In order to make these loans “fit” lenders — creative creatures themselves — did the following:

The financial industry noticed that the increased demand for homes was causing the average price of homes to accelerate beyond the normal rates of inflation thus creating “new equity” for homeowners. Both the financial institutions and the government regulators reasoned that even if a new buyer did not have the traditional ten to twenty percent equity to purchase a home initially, that they would “acquire” that equity within a short period of time because of the rapid escalation of the average price of homes. If, in a short period of time, the value of the home exceeded the mortgage by ten to twenty percent the bank regulators would be satisfied that mortgages were secure and the financial institutions were sound. All of that might be true if you assume that the average price of housing would continue to escalate at a rate greater than inflation forever more.

When, inevitably, growth does slow or decline (as it always has) those relying on those expectations find themselves overextended with no means of recovery.

But even with the new “no equity” loans, many still did not have the revenue stream to qualify for payment of the loans. The financial institutions, ever creative, derived, with the approval of government regulators, a new series of “sub-prime loans” which essentially matched the payment schedules to the available revenue stream of the borrower rather than determining whether there was a sufficient revenue stream to amortize the loan over thirty years. In most instances this took the form of reduced payments for an introductory period followed by escalated payments somewhere down the road. In many instances, the borrower’s loan increased annually to account for the difference between his payment and the amount actually needed to amortize the loan. The banks and the government regulators reasoned that so long as the value of the house was increasing annually, the borrower’s equity was growing and was available to be “loaned against” to subsidize the low initial payments. Said more simply, for the initial period, the borrowers were required to borrow more to pay the interest on the amount they borrowed initially.

And said yet another way, these borrowers could not afford the loans on the day they borrowed, could not afford the loans for the initial period of reduced payments, and more than likely would not be able to afford the loans when payments escalated. The financial institutions were counting on the fact that housing prices would continue to accelerate and that their loans would be secure regardless of what happened to the borrowers.

For the housing market, the growth in the number of persons now able to find this “new financing” meant even greater demand and the builders and developers launched an unprecedented wave of construction on the assumption that the demand would never abate. The demand was further accelerated by the entry of speculators who would buy, not with the expectation of living in a home, but with the anticipation that they would resell it in a short period of time with a nice return based on escalating demand.

It was a perfect storm. Borrowers who could not and would not repay their mortgage loans on property that was inflated by an artificial demand. The inevitable happened. The housing market crashed and the mortgage market followed closely behind. Those people, who could not afford the loans on the day they were made, could not afford the loans during their initial “sub-prime term, and could not afford them when the payments escalated to traditional levels, defaulted on the loans and eventually lost their homes.

And now the trial lawyers, civil rights activists and race baiters are “surprised.” Now they allege that the banks were tempting these unfortunate souls with visions of the American dream — home ownership. They are aghast that banks and mortgage companies would stoop to contrivances such as sub-prime mortgages to seduce the low income population into borrowing money that they could not afford to repay.

And by the way, the traditional recovery for such class action suits is that the trial lawyers get millions and the victims get screwed again.

Is there no shame?